Personal Finance: Don't Let Divorce Break Up Your Business
"Divorce is like war," says New York City divorce lawyer Raoul Felder. "You have to plan in advance or you won't be successful in protecting your -- and your company's -- interests. If you act only at the last minute, anything you do can be undone by a competent lawyer on your spouse's side."
A prenuptial agreement, experts maintain, is the best way for an entrepreneur to divorce-proof his or her company. But if you didn't take that precaution, all is not lost. "The first step is to consult a matrimonial lawyer -- not your corporate lawyer -- as early as possible," advises Alan Toback, a lawyer with the Chicago law firm Lake, Toback & Yavitz. "You need an expert's assistance. And remember, your corporate attorney may wind up having to testify as a witness during the course of divorce proceedings."
The facts of life for an entrepreneur? "In 99% of cases, judges won't hand over the company keys to a nonworking spouse," notes Toback. "But the judge will give the spouse cash or other awards to compensate for the company's value, as well as for whatever personal contributions he or she made to the company."
It's never too soon to start keeping careful records of business meetings and other corporate events, in order to demonstrate that your nonworking spouse is really uninvolved. "In divorce it's often a matter of 'He who has the best records wins," says Felder.
An entrepreneur's goal should be, quite simply, to avoid a financial award that is so generous or so onerous that it impairs the ability of the company to survive. You can minimize such risk by making certain you keep your corporate and personal finances distinct.
"Sometimes business borrowings are secured by personal guarantees, and families use marital funds to pay off the notes. That's a mistake that needs to be rectified," says Toback, "because you want to avoid the judge's assessment that there's been such a commingling of personal and business funds that they need to be considered one and the same when it comes to a financial settlement."
Don't try to solve that problem by paying off all your debt. "Debt is good in these situations," Toback adds, "because you don't necessarily want it to seem that your business is in great shape." For that reason he also suggests slowing down bill-collection efforts. "If you've got a lot of old receivables, it will raise questions in the judge's mind about the likelihood of their being collected. You don't want to put your business in jeopardy, but anything you can do to reduce profits and keep up your expenses -- without raising any red flags -- definitely helps."